nep-mac New Economics Papers
on Macroeconomics
Issue of 2007‒09‒09
fifty-five papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Discretion and the transmission lags of monetary policy By Kilponen, Juha; Leitemo, Kai
  2. Labour Market Dynamics and the Business Cycle: Structural Evidence for the United States By Ravn, Morten O.; Simonelli, Saverio
  3. Strategic Complementarities and Optimal Monetary Policy By Levin, Andrew; López-Salido, J David; Yun, Tack
  4. Gradual Wage-Price Adjustments, Labour Market Frictions and Monetary Policy Rules By Christian Proaño Acosta
  5. The Macroeconomic Effects of Oil Shocks: Why are the 2000s So Different from the 1970s? By Olivier J. Blanchard; Jordi Gali
  6. Macroeconomic Conditions and Business Exit: Determinants of Failures and Acquisitions of UK Firms By Arnab Bhattacharjee; Chris Higson; Sean Holly; Paul Kattuman
  7. Labor-Market Search, Financial Market Integration, and the Fiscal Multiplier By Cenesiz, Alper; Pierdzioch, Christian
  8. How Effective is Government Spending in a Small Open Economy with Distortionary Taxes By Carlos Garcia; Jorge Restrepo
  9. Information Acquisition by Price-Setters and Monetary Policy By Volker Hahn
  10. The euro goes East. Implications of the 2000-2002 economic slowdown for synchronisation of business cycles between the euro area and CEEs By Fidrmuc, Jarko; Korhonen, Iikka
  11. Housing and the monetary transmission mechanism By Frederic S. Mishkin
  12. The Case for a Countercyclical Rule-based Fiscal Regime By Carlos Garcia; Jorge Restrepo
  13. Fiscal Policy, Labour Unions and Monetary Institutions: Their Long Run Impact on Unemployment, Inflation and Welfare By Cukierman, Alex; Dalmazzo, Alberto
  14. Exchange Market Pressure and Monetary Policy: Evidence from Pakistan By M. Idrees Khawaja
  15. Interest Rate Signals and Central Bank Transparency By Pierre Gosselin, Aileen Lotz and Charles Wyplosz
  16. Learning and optimal monetary policy By Richard Dennis; Federico Ravenna
  17. The Speed of Adjustment to Demand Shocks: A Markov-chain Measurement Using Micro Panel Data By Christian Müller; Eva Köberl
  18. Which Interest Rate Should We Use In The Is Curve? By John J. Heim
  19. The missing link: the finance-growth nexus and the Guyanese growth stagnation By Khemraj, Tarron
  20. Macroeconomic Differentials and Adjustment in the Euro Area By Iulia Traistaru-Siedschlag
  21. Modelling Sovereign Bond Yield Curves of the US, Japan and Germany By Chi-sang Tam; Ip-wing Yu
  22. Why do banks demand excess liquidity? Evidence from Guyana By Khemraj, Tarron
  23. A VAR Framework for Forecasting Hong Kong'S Output and Inflation By Hans Genberg; Jian Chang
  24. Estimating a New Keynesian Phillips Curve with a Corrected Measure of Real Marginal Cost: Evidence in Japan By Muto, Ichiro
  25. Reforms, Macroeconomic Policy and Economic Performance in Germany By Carlin, Wendy; Soskice, David
  26. Hong Kong's Economic Integration and Business Cycle Synchronisation with Mainland China and the US By Hans Genberg; Li-gang Liu; Xiangrong Jin
  27. Fiscal Discipline as a Social Norm: The European Stability Pact By Jean-Paul Fitoussi; Francesco Saraceno
  28. A Framework for Stress Testing Bank's Credit Risk By Jim Wong; Ka-fai Choi; Tom Fong
  29. Accounting for the Rise in Consumer Bankruptcies By Igor Livshits; James MacGee; Michèle Tertilt
  30. The Information Content of Inflationary Expectations Derived from Bond Prices in Israel By Elkayam, David; ILek, Alex
  31. Asset Pricing in a Production Economy with ChewÐDekel Preferences By Claudio Campanale; Rui Castro; Gian Luca Clementi
  32. Incentives and the Limits to Deflationary Policy By David Andolfatto
  33. Do asymmetric terms of trade shocks affect private savings in a transition economy? By Chowdhury , Abdur R.
  34. Transaction costs and consumption By Geng Li
  35. Temporal Distribution of Price Changes: Staggering in the Large and Synchronization in the Small By Emmanuel Dhyne; Jerzy Konieczny
  36. The Post-Crisis Sequencing of Economic Integration in Asia: Trade as a Complement to a Monetary Future By Michael G. Plummer
  38. Can investors profit from banks’ stock recommendations? Evidence for the German DAX index By Pierdzioch, Christian; Kempa, Bernd; Hendricks, Torben
  39. Mortgage Timing By Ralph S.J Koijen; Otto Van Hemert; Stijn Van Nieuwerburgh
  40. Exploring Lebanon ' s growth prospects By Nahas, Charbel; Dessus, Sebastien; Berthelemy, Jean-Claude
  41. Big bad banks ? the impact of U.S. branch deregulation on income distribution By Levkov, Alexey; Levine, Ross; Beck, Thorsten
  42. "Endogenous Money: Structuralist and Horizontalist" By L. Randall Wray
  43. Optimum currency area theory: A selective review By Horvath , Julius
  44. A Comparison of GDP Per Capita in Canada and the United States from 1994 to 2005 By Maynard, Jean-Pierre
  46. Comparing Quantitative and Qualitative Survey Data By Rolf Schenker
  47. The Cyclicality of Effective Wages within Employer-Employee Matches : Evidence from German Panel Data By Silke Anger
  48. Price Points and Price Rigidity By Daniel Levy; Dongwon Lee Author-Workplace-Name: Korea University; Haipeng Allan Chen Author-Workplace-Name: University of Miami, USA; Robert J. Kauffman Author-Workplace-Name: Arizona State University and University of Minnesota, USA; Mark Bergen Author-Workplace-Name: University of Minnesota, USA
  49. Simulation der Schuldenbremse und der Schuldenschranke für die deutschen Bundesländer By Groneck, Max; Plachta, Robert
  50. Culture as Learning: The Evolution of Female Labor Force Participation over a Century By Raquel Fernandez
  51. Silvio Gesell, socialiste proudhonien et réformateur monétaire By Jérôme Blanc
  52. Does A Strong Dollar Increase Demand For Both Domestic And Imported Goods? By John J. Heim
  53. Imperfect Knowledge of Pension Plan Type By Alan L. Gustman; Thomas Steinmeier; Nahid Tabatabai
  54. Nonseparable Preferences and Optimal Social Security Systems By Borys Grochulski; Narayana Kocherlakota
  55. Delivering Access to Safe Drinking Water and Adequate Sanitation in Pakistan By Faheem Jehangir Khan; Yaser Javed

  1. By: Kilponen, Juha (Bank of Finland Research); Leitemo, Kai (Norwegian School of Management (BI))
    Abstract: Monetary policy transmission lags create credibility problems for the inflation-targeting policy maker who acts under discretion. We show that if prices react to monetary policy with a longer lag than output, the welfare maximizing inflationtargeting policy implies no policy stabilization of cost-push shocks in the canonical New Keynesian model. The reason is simple: for the period monetary policy influences output, inflation is predetermined and the best discretionary policy is to stabilize the output gap fully. We find that money growth targeting comes close to replicating the welfare-maximizing policy under commitment if there are transmission lags.
    Keywords: discretionary and stabilization bias; monetary policy; transmission lags; inflation targeting; money targeting
    JEL: E52 E58 E61
    Date: 2007–08–15
  2. By: Ravn, Morten O.; Simonelli, Saverio
    Abstract: We use a 12-dimensional VAR to examine the dynamic effects on the labour market of four structural technology and policy shocks. For each shock, we examine the dynamic effects on the labour market, the importance of the shock for labour market volatility, and the comovement between labour market variables and other key aggregate variables in response to the shock. We document that labour market indicators display "hump-shaped" responses to the identified shocks. Technology shocks and monetary policy shocks are important for labour market volatility but the ranking of their importance is sensitive to the VAR specification. The conditional correlations at business cycle frequencies are similar in response to the four shocks apart from the correlations between hours worked, labour productivity and real wages. To account for the unconditional correlations between these variables, a mixture of shocks are required.
    Keywords: Beveridge curve; Dunlop; Dunlop-Tarshis observation; labour market dynamics; neutral and investment specific technology shocks; structural VAR
    JEL: C32 E24 E32 E52 E62
    Date: 2007–08
  3. By: Levin, Andrew; López-Salido, J David; Yun, Tack
    Abstract: In this paper, we show that strategic complementarities--such as firm-specific factors or quasi-kinked demand--have crucial implications for the design of monetary policy and for the welfare costs of output and inflation variability. Recent research has mainly used log-linear approximations to analyze the role of these mechanisms in amplifying the real effects of monetary shocks. In contrast, our analysis explicitly considers the nonlinear properties of these mechanisms that are relevant for characterizing the deterministic steady state as well as the second-order approximation of social welfare in the stochastic economy. We demonstrate that firm-specific factors and quasi-kinked demand curves yield markedly different implications for the welfare costs of steady-state inflation and inflation volatility.
    Keywords: firm-specific factors; quasi-kinked demand; welfare analysis
    JEL: E31 E32 E52
    Date: 2007–08
  4. By: Christian Proaño Acosta (IMK at the Hans Boeckler Foundation)
    Abstract: Contrary to the assumption of perfectly flexible labour markets commonly used in mainstream macroeconomic models, in the real world the existence of structural imperfections such as search and trading costs hinder the frictionless functioning of these markets, generally leading to outcomes of Non-Walrasian type with involuntary unemployment and open vacancies in "equilibrium". In this paper the author models the existence of labour market frictions into a Keynesian (Disequilibrium) AS-AD framework in the line of Asada, Chen, Chiarella and Flaschel (2006) through a labour search and matching function. By means of dynamic shock simulations, the author finds that the extent of the labour market rigidity has a great importance for the dynamics not only of employment and output, but also of wage and price inflation, and consequently also for the conduction of monetary policy.
    Keywords: Labour market frictions, staggered wage and price dynamics, (D)AS- AD, monetary policy
    JEL: E31 E52
    Date: 2007
  5. By: Olivier J. Blanchard; Jordi Gali
    Abstract: We characterize the macroeconomic performance of a set of industrialized economies in the aftermath of the oil price shocks of the 1970s and of the last decade, focusing on the differences across episodes. We examine four different hypotheses for the mild effects on inflation and economic activity of the recent increase in the price of oil: (a) good luck (i.e. lack of concurrent adverse shocks), (b) smaller share of oil in production, (c) more flexible labor markets, and (d) improvements in monetary policy. We conclude that all four have played an important role.
    JEL: E20 E32 E52
    Date: 2007–09
  6. By: Arnab Bhattacharjee; Chris Higson; Sean Holly; Paul Kattuman
    Abstract: We study the impact of macroeconomic instability on business exit in a world where acquisition and bankruptcy are co-determined. Our objective is to discover how the processes that determine bankruptcies and acquisitions depend on the macroeconomic environment, particularly, macroeconomic instability. To this end we estimate competing risks hazard regression models using data on UK quoted firms spanning a thirty-eight year period that witnessed several business cycles. We find that macroeconomic instability has opposite effects on bankruptcy hazard and acquisition hazard, raising the former and lowering the latter. While it is not surprising that bankruptcy hazard is counter-cyclical and acquisition hazard pro-cyclical, it is noteworthy that the US business cycle is a better predictor of UK acquisitions and bankruptcies than the UK cycle itself.
    Keywords: Bankruptcy, Acquisitions, Macroeconomic Instability, Competing Risks, Cox Proportional Hazards Model.
    JEL: E32 D21 C41 L16
    Date: 2007–09
  7. By: Cenesiz, Alper; Pierdzioch, Christian
    Abstract: We used a two-country optimizing “new-open-economy macroeconomics” model to analyze the implications of financial market integration for the fiscal multiplier. The fiscal multiplier measures the accumulated effect of fiscal policy on output. Our model features a labor-market friction in the form of labor-market search. The conventional wisdom derived from the classic Mundell-Fleming model has been that financial market integration diminishes the fiscal multiplier. We show that labor-market search model implies that financial market integration should increase rather than decrease the fiscal multiplier.
    Keywords: Open-economy macroeconomics; Financial market integration; Labor-market search; Fiscal policy
    JEL: F36 F41 E62
    Date: 2006–03
  8. By: Carlos Garcia (ILADES-Georgetown University, Universidad Alberto Hurtado); Jorge Restrepo (Banco Central de Chile)
    Abstract: We build a general equilibrium model of a small open economy, which includes rule-of-thumb consumers, and staggeredd prices and wages, as well as distortionary taxes. The analysis of government spending based on the responses to a government spending shock under three different rules and the sensitivity of several impact multipliers to alternative calibrations. The effect of the shock on consumption and GDP depends on the price elasticity of net exports; the share of rule-of-thumb consumers and domestic goods in the government basket; and finally, the fiscal rule in place. Indeed the response of consumption is more persistent with the rule that adjust spending to close the debt-financed deficit than with the other two rules.
    Keywords: open economy, fiscal multiplier, rule of thumb consumers, government spending
    JEL: E32 E62
    Date: 2007–08
  9. By: Volker Hahn (Center of Economic Research (CER-ETH) at ETH Zurich)
    Abstract: In this paper we examine a model where firms decide on the intensity of information acquisition about shocks. We analyze how the monetary policy framework impacts on the aggregate amount of information collected by firms. We show that it is socially beneficial to delegate monetary policy to a conservative central bank even if there are no incentives to push output above its long-run level. Transparency of central banks about economic shocks has ambiguous eects on welfare. If an extreme level of opacity is feasible, it represents the social optimum. Otherwise full transparency may be a second-best solution.
    Keywords: conservative central banker, optimal monetary policy, information acquisition, Phillips curve, transparency
    JEL: E58 E13 E12
    Date: 2005–03
  10. By: Fidrmuc, Jarko (BOFIT); Korhonen, Iikka (BOFIT)
    Abstract: We assess the correlation of supply and demand shocks between current countries in the euro area and EU accession candidates from 1993/1995 to 2002. Supply and demand shocks are recovered from estimated structural VAR models of output growth and inflation. Notably, the economic slowdown between 2000 and 2002 increased heterogeneity of business cycles between the euro area and acceding counties. We find that several acceding countries have a quite high correlation of underlying shocks with the euro area and conclude that continuing integration within the EU is likely to align the business cycles of these countries in a manner similar to the synchronisation of supply and demand shocks we document for the EU in the 1990s.
    Keywords: optimum currency area; EU enlargement; structural VAR
    JEL: E32 F42
    Date: 2007–09–05
  11. By: Frederic S. Mishkin
    Abstract: The housing market is of central concern to monetary policy makers. To achieve the dual goals of price stability and maximum sustainable employment, monetary policy makers must understand the role that housing plays in the monetary transmission mechanism if they are to set policy instruments appropriately. In this paper, I examine what we know about the role of housing in the monetary transmission mechanism and then explore the implications of this knowledge for the conduct of monetary policy. I begin with a theoretical and empirical review of the main housing-related channels of the transmission mechanism. These channels include the ways interest rates directly influence the user cost of housing capital, expectations of future house-price movements, and housing supply; and indirectly influence the real economy through standard wealth effects from house prices, balance sheet, credit-channel effects on consumer spending, and balance sheet, credit-channel effects on housing demand. I then consider the interaction of financial stability with the monetary transmission mechanism, and discuss the ways in which the housing sector might be a source of financial instability, and whether such instability could affect the ability of a central bank to stabilize the overall macroeconomy. I conclude with a discussion of two key policy issues. First, how can monetary policy makers deal with the uncertainty with regard to housing-related monetary transmission mechanisms? And second, how can monetary policy best respond to fluctuations in asset prices, especially house prices, and to possible asset-price bubbles?
    Date: 2007
  12. By: Carlos Garcia (ILADES-Georgetown University, Universidad Alberto Hurtado); Jorge Restrepo (Banco Central de Chile)
    Abstract: We build a general equilibrium model of a small open economy, with the purpose of analyzing the effects of a countercyclical rule-based fiscal regime, which corresponds to a stylized version of the structural balance in place in Chile. The economy exports a domestically-produced good and one natural resource (commodity), which is partly state-owned, generating income to the government. We analyze how shocks are transmitted to the economy in the presence of this fiscal rule by introducing shocks to government spending, taxes, and the price of the natural resource. In the last shock, we compare our structural rule with a case where the budget is always balanced. The results make a strong case for the adoption of the latter in other commodityexporting economies.
    Keywords: open economy, fiscal policy, rule of thumb consumers, government spending.
    JEL: E32 E62 H41
    Date: 2007–07
  13. By: Cukierman, Alex; Dalmazzo, Alberto
    Abstract: OBJECTIVES AND MOTIVATION: This paper considers the impact of interactions between fiscal policy and monetary institutions in the presence of unionized labour markets on economic outcomes and welfare in the long run. Two main classes of questions are investigated. First, what is the impact of exogenously given labour taxes and unemployment benefits on the choice of monetary policy by the central bank, on the choice of nominal wages by unions, on the choice of prices by monopolistically competitive firms and through them on unemployment, inflation and welfare? Second, how are labour taxes and redistribution chosen by a (Stackelberg leader) fiscal authority whose objectives are a weighted average of social welfare and of catering to the interests of political supporters, and how does the general equilibrium induced by this choice affect welfare? The framework of the paper is motivated by the European scene in which the fraction of the labour force covered by collective agreements dominates wage setting in the labour market. "PLAYERS" AND PAYOFFS: The model economy features labour unions that maximize the expected real income of union members over states of employment and of unemployment, a central bank that strives to minimize the combined costs of inflation and of unemployment, and a continuum of monopolistically competitive firms, each of which maximizes its profits. The last part of the paper also features a fiscal authority that sets taxes and redistribution so as to maximize a combination of social welfare and of benefits to particular constituencies. Utility from consumption is characterized by means of a CES, Dixit-Stiglitz, utility function and (as in Sidrauski type models) money appears in the utility function. METHODOLOGY AND "PLAYERS" STRATEGIES: The first question is investigated within a three stage game in which labour unions move first and commit to nominal wages and the central bank moves second and chooses the money supply. In the third and last stage each of a large number of monopolistically competitive firms picks its price. To deal with the second class of questions the game is expanded to feature a preliminary stage in which government chooses labour taxes and redistribution anticipating the subsequent responses of the other players. General equilibrium is characterized and used to find the impact of various economic and institutional parameters.
    Keywords: labour unions; long run inflation unemployment tradeoff; monopolistic competition; fiscal monetary policy interactions; monetary institutions; politics and fiscal policy; welfare
    JEL: E5 E6 H2 J3 J5 L1
    Date: 2007–08
  14. By: M. Idrees Khawaja (Pakistan Institute of Development Economics, Islamabad.)
    Abstract: The study employs Girton and Roper (1977) measure of exchange market pressure—sum of exchange rate depreciation and foreign reserves outflow, to examine the interaction between exchange market pressure and monetary variables, viz. domestic credit (Reserve Money) and interest rate. Evidence from impulse response functions suggests that domestic credit has remained the dominant tool of monetary policy for managing exchange market pressure. The increase in domestic credit upon increase in exchange market pressure (during 1991–98) is imprudent. The result suggests that fiscal needs/growth objective might have dominated the external account considerations during the span. Post 9/11 there is evidence of sterilised intervention in forex market. Interest rate has also weakly served as the tool of monetary policy during the hay days of foreign currency deposits (1991–98). The finding implies that for interest rate to work as tool of monetary policy vis-a-vis exchange market pressure a reasonable degree of capital mobility is called for.
    Keywords: Monetary Policy, Foreign Exchange
    JEL: E52 F31
    Date: 2007
  15. By: Pierre Gosselin, Aileen Lotz and Charles Wyplosz (IUHEI, The Graduate Institute of International Studies, Geneva)
    Abstract: The present paper extends the literature on central bank transparency that relies on information heterogeneity among private agents in four directions. First, it adds the interest rate to the list of signals that the central bank can reveal. Second, it allows for more than one economic fundamental. Third, it extends the range of uncertainties that matter. So far the literature has focused on uncertainty about the economic fundamentals, assumed to be estimated with known precision; we also allow for uncertainty about precision. Fourth, it derives results that are general in the sense that they do not depend on any particular social welfare criterion. Each extension sheds new light on the role of central bank transparency.
    Keywords: central bank transparency, monetary policy, information asymmetry
    JEL: E42 E52 E58
    Date: 2007–08–24
  16. By: Richard Dennis; Federico Ravenna
    Abstract: To conduct policy efficiently, central banks must use available data to infer, or learn, the relevant structural relationships in the economy. However, because a central bank's policy affects economic outcomes, the chosen policy may help or hinder its efforts to learn. This paper examines whether real-time learning allows a central bank to learn the economy's underlying structure and studies the impact that learning has on the performance of optimal policies under a variety of learning environments. Our main results are as follows. First, when monetary policy is formulated as an optimal discretionary targeting rule, we find that the rational expectations equilibrium and the optimal policy are real-time learnable. This result is robust to a range of assumptions concerning private sector learning behavior. Second, when policy is set with discretion, learning can lead to outcomes that are better than if the model parameters are known. Finally, if the private sector is learning, then unannounced changes to the policy regime, particularly changes to the inflation target, can raise policy loss considerably.
    Keywords: Monetary policy
    Date: 2007
  17. By: Christian Müller (KOF Swiss Economic Institute, ETH Zurich); Eva Köberl (KOF Swiss Economic Institute, ETH Zurich)
    Abstract: In this paper we measure the speed at which firms adjust to demand shocks using individual firm data. Identification of shocks is achieved by a combination of quantitative and qualitative judgments on capacity utilisation in micro survey data. A novel feature of our approach is the distinction between positive and negative shocks that allows us to also discriminate between the speed of adjustment following either kind of shock. Furthermore, there is no need for using previous data filtering to extract business cycles or equilibrium definitions but only to observe the states of the firms that define their economic situation. One main result is that the firms’ adjustment to these two shocks is varying in speed. It should therefore be paid regard to the separation of positive and negative shocks in empirical and theoretical models. The findings of this paper bear implications for monetary policy making and model building alike.
    Keywords: demand shock, Markov-chain, microfoundation
    JEL: E32 C4 C5
    Date: 2007–06
  18. By: John J. Heim (Department of Economics, Rensselaer Polytechnic Institute, Troy, NY 12180-3590, USA)
    Abstract: Do interest rates effect investment and the GDP? If so, which ones, and by how much? Research on this topic over 5 decades has produced conflicting results. Yet, this question is of critical importance to the viability of Keynesian macroeconomics. This paper attempts to explain why results have been conflicting. It also attempts to determine with some finality which rate(s), if any, are related to GDP through the standard Keynesian mechanism: the IS curve. The paper tests exhaustively (1) a variety of real and nominal rates, (2) different hypotheses about how businesses calculate “real” interest rates (3) how the number of lags used affects results, (4) whether small sample size inherent in annual time series data adversely affects results, and (5) whether lack of hetroskedasticity and autocorrelation controls in earlier studies influenced their findings. This paper concludes only the real prime or Federal funds rates, lagged two years and the nominal current mortgage rate are significantly related to variation in the GDP, and running the prime rate alone picks up most of the variation in both. The prime rate was found to be twice as important as the mortgage rate. It also finds relatively small size (40 observation) annual data sets do not lead to problems achieving statistical significance, at least in simple IS curve models. It also finds that post - 1980 White and Newey - West correction methods for hetroskedasticity make it far more likely that any of a wide variety of interest rates and lags will be found statistically significant than was the case in earlier studies, but that correcting for multicollinearity between rates again leaves only the real prime and Federal funds rate lagged two periods and perhaps the current nominal mortgage rate significant. The effect of changes in the prime rate and mortgage rates on the GDP, though systematic, appears to be small, implying the IS curve may be nearly vertical and the Fed’s interest rate policy of little significance unless rate changes are draconian. We estimate that even a five percentage - point change in the real Federal funds and prime rates changes GDP only 2.4%, and employment only 1.2% maximally (using Okun’s law). Other findings were that nominal interest rates deflated by adaptive expectations models of inflation using the past two year’s inflation seem to best describe how businesses calculate real rates. Rational expectations models were least successful. Other rates examined include the ten year treasury rate, the Aaa and Baa corporate rates. They were seldom found statistically significant, but the mortgage rate’s estimated marginal effect seems to also capture these rates’ effect on the economy.
    JEL: E12 E22 E40
    Date: 2007–08
  19. By: Khemraj, Tarron
    Abstract: This paper argues that the liberalization of the Guyanese financial system did not lead to the growth as postulated by the theory that underpins the reform agenda. The paper posits that the oligopolistic nature of the banking system is the key omission of the theory. Oligopoly banks will seek to mark-up the loan rate and contract credit to private agents when those agents cannot pay the minimum mark-up rate. Empirical validation of the mark-up loan rate comes from an excess liquidity preference curve that is horizontal at a very high loan rate. The flat curve signifies that non-remunerative excess liquidity and interest paying loans are perfect substitutes at a very high loan rate. After banks restrict loans, they will either hold excess reserves and/or foreign assets. Such investment behavior presents a developmental bottleneck, and therefore a key explanation for the growth stagnation after the liberalization. The paper also argues that indirect monetary policy, a cornerstone of financial liberalization, is ineffective at the high minimum mark-up rate. Monetary policy can only be effective at very high interest rates, which are detrimental to growth and employment creation.
    Keywords: finance-growth nexus; oligopoly banking; monetary policy; Guyana
    JEL: O16 E52 O11
    Date: 2007–07
  20. By: Iulia Traistaru-Siedschlag (Economic and Social Research Institute (ESRI))
    Date: 2006–10
  21. By: Chi-sang Tam (Research Department, Hong Kong Monetary Authority); Ip-wing Yu (Research Department, Hong Kong Monetary Authority)
    Abstract: The movement of sovereign yields is important for both investment and risk management. In this paper, we apply a method that was first developed by Diebold et al (2006b) to model the sovereign bond yield curves of the US, Japan and Germany. By including observable macroeconomic variables and the latent factors of the yield curve, we find evidence of strong interaction between the yield curve and macro variables in the US and Germany but not in Japan. We also estimate the dynamic conditional correlations of the latent factors to reveal cross-country correlations of the bond markets.
    Keywords: Yield curve, Term structure, Interest rate, Kalman filter
    JEL: G1 E4 C5
    Date: 2007–06
  22. By: Khemraj, Tarron
    Abstract: This paper posits two alternative hypotheses to explain why commercial banks demand non-remunerative excess liquidity. The first hypothesis holds that banks require a minimum interest rate in the loan market and the market for the domestic short-term government security. The minimum rates are mark-up interest rates owing to oligopoly power in the loan market and oligopsony power in the government security market. The second hypothesis is the existence of a foreign currency constraint, which explains why banks seemingly refuse to invest all excess funds in safe accounts abroad. The stylized facts, econometric and calibration exercises are consistent with the hypotheses.
    Keywords: oligopoly banking; excess liquidity; monetary policy; small open economies; Guyana
    JEL: O16 O10 E52 E50
    Date: 2007–06
  23. By: Hans Genberg (Research Department, Hong Kong Monetary Authority); Jian Chang (Research Department, Hong Kong Monetary Authority)
    Abstract: This paper develops a multivariate time series model to forecast output growth and inflation in the Hong Kong economy. We illustrate the steps involved in designing and building a vector autoregression (VAR) forecasting model, and consider three types of VAR models, including unrestricted, Bayesian and conditional VARs. Our findings suggest that the Bayesian VAR framework incorporating external influences provide a useful tool to produce more accurate forecasts relative to the unrestricted VARs and univariate time series models, and conditional forecasts have the potential to further improve upon the Bayesian models. In particular, a six-variable Bayesian VAR including domestic output, domestic inflation, domestic investment, world GDP, the best lending rate, and import prices appears to generate good out-of-sample forecasts results.
    Keywords: VAR and BVAR models, conditional forecasts, forecasting, model evaluation
    JEL: C52 C53 E37
    Date: 2007–03
  24. By: Muto, Ichiro
    Abstract: We estimate a New Keynesian Phillips curve (NKPC) in Japan, focusing on the measurement of real marginal cost (RMC). Especially, we correct labor share by taking account of two kinds of labor market frictions: (i) labor adjustment costs and (ii) real wage rigidity. Our results show that the consideration of these labor market frictions greatly improves the fit of Japan's NKPC. Furthermore, if we additionally incorporate materials prices in the calculation of RMC, then the fit of the NKPC is further improved. Our most important finding is that the conventional backward-looking component is no more needed to explain Japan's inflation dynamics if we use a corrected measure of RMC.
    JEL: E31
    Date: 2007–07
  25. By: Carlin, Wendy; Soskice, David
    Abstract: The conventional diagnosis of Germany’s poor economic performance focuses on supply-side weaknesses and the need for more vigorous reforms to make low-skill labour markets more flexible. We question this on both theoretical and empirical grounds. In an extended version of a New Keynesian model shifts in aggregate demand can move the economy along a range of constant-inflation medium-run unemployment equilibria. The evolution of the real exchange rate and the external balance help to identify whether aggregate supply or aggregate demand shifts have been dominant in accounting for changes in unemployment. We provide some prima facie evidence for Germany and the UK that aggregate demand factors have played an important role in sustaining growth in the UK and weakening it in Germany over the medium run. We show that Germany has a relatively strong record in implementing OECD recommended reforms but the expected employment effects in low-skill service sectors appear disappointing and poverty has increased. By contrast, it is in high productivity sectors including services that the German economy has performed well, especially in exports. Here labour markets are not flexible in the conventional sense: codetermination, vocational training, and coordinated wage bargaining are important. We pursue the implications of these claims for the design and political economy of reforms in Germany.
    Keywords: aggregate demand; German economic performance; labour market reforms; macroeconomic policy
    JEL: E65 J59
    Date: 2007–08
  26. By: Hans Genberg (Research Department, Hong Kong Monetary Authority); Li-gang Liu (Research Department, Hong Kong Monetary Authority); Xiangrong Jin (Research Department, Hong Kong Monetary Authority)
    Abstract: While Hong Kong's monetary policy is effectively tied to the US, its real economy has been experiencing increased integration with the Mainland through trade, Foreign Direct Investment (FDI), tourism, and increasingly financial flows. Co-movements of business cycles in Hong Kong and the Mainland have increased steadily since the 1990s. Although its co-movements with the US dipped in the late 1990s, there has been a significant increase in the synchronisation of business cycles among these three economies since 2000. This finding naturally raises a question as to what factors drive the co-movements of business cycles among the three economies. Our structural vector auto-regression analysis suggests that over the medium to long run, about 60% and 45% of variations in output and prices in Hong Kong respectively can be explained by US shocks, while the impact of Mainland shocks mostly concentrates on Hong Kong's price movements. It is estimated that Mainland shocks explain over one-third of Hong Kong's price developments. Using a methodology to distinguish between the effects of common US shocks and idiosyncratic domestic shocks, we find little correlation between the business cycles in Hong Kong and the Mainland in the absence of the common US influences, whereas the influence of the US shocks on these two economies leads to a high degree of synchronisation. In other words, the business cycle co-movements of Hong Kong and the Mainland are largely due to the common influence of economic conditions in the Unites States and possibly their US dollar pegged exchange rate system. The lack of similarity of domestic shocks between Hong Kong and the Mainland can be mostly attributed to their continuing structural differences and stage of economic development. Since the similarity of shocks is the most important factor for the choice of exchange rate regime, it follows that the Linked Exchange Rate system based on the US dollar would continue to be desirable in the foreseeable future.
    Date: 2006–09
  27. By: Jean-Paul Fitoussi (Observatoire Français des Conjonctures Économiques); Francesco Saraceno (Observatoire Français des Conjonctures Économiques)
    Abstract: This paper reviews the arguments for and against the ‘Stability and Growth Pact’ signed by the countries of the Euro area. We find the theoretical debate to be inconclusive, as both externality and credibility arguments can be used to yield opposite, and equally plausible conclusions. We also argue that evidence in favour of a Pact-like rule is scant. We therefore suggest the view that the Stability Pact is a public social norm, and that a country’s adherence to that norm is in fact a response to the need to preserve reputation among the other members of the European Union. Using this extreme but not implausible hypothesis, we build a simple model similar in spirit to Akerlof’s (1980) seminal paper on social norms, and we show that reputation issues may cause the emergence of a stable but inferior equilibrium. We further show that after the enlargement, with a number of countries anxious to prove their ‘soundness’ joining the club, the problems posed by the pact/social norm are likely to increase.
    Keywords: Stability Pact, Fiscal Rules, Fiscal Policy, Social Norms, Reputation, Enlargement
    JEL: D63 D71 E62 E63
    Date: 2007
  28. By: Jim Wong (Research Department, Hong Kong Monetary Authority); Ka-fai Choi (Research Department, Hong Kong Monetary Authority); Tom Fong (Research Department, Hong Kong Monetary Authority)
    Abstract: This paper develops a framework for stress testing the credit exposures of Hong Kong's retail banks to macroeconomic shocks. It involves the construction of macroeconomic credit risk models, each consisting of a multiple regression model explaining the default rate of banks, and a set of autoregressive models explaining the macroeconomic environment estimated by the method of seemingly unrelated regression. Specifically, two macroeconomic credit risk models are built. One model is specified for the overall loan portfolios of banks and, to illustrate how the same framework can be applied for stress testing loans to different economic sectors, the other model is specified for the banks' mortgage exposures only. The empirical results suggest a significant relationship between the default rates of bank loans and key macroeconomic factors including Hong Kong¡¦s real GDP, real interest rates, real property prices and Mainland China's real GDP. Macro stress testing is then performed to assess the vulnerability and risk exposures of banks' overall loan portfolios and mortgage exposures. By using the framework, a Monte Carlo method is applied to estimate the distribution of possible credit losses conditional on an artificially introduced shock. Different shocks are individually introduced into the framework for the stress tests. The magnitudes of the shocks are specified according to those occurred during the Asian financial crisis. The result shows that even for the Value-at-Risk (VaR) at the confidence level of 90%, banks would continue to make a profit in most stressed scenarios, suggesting that the current credit risk of the banking sector is moderate. However, under the extreme case for the VaR at the confidence level of 99%, banks' credit loss would range from a maximum of 3.22% to a maximum of 5.56% of the portfolios, and if a confidence level of 99.9% is taken, it could range from a maximum of 6.08% to a maximum of 8.95%. These estimated maximum losses are very similar to what the market experienced one year after the Asian financial crisis shock. However, the probability of such losses and beyond is very low.
    Date: 2006–10
  29. By: Igor Livshits; James MacGee; Michèle Tertilt
    Abstract: Personal bankruptcies in the United States have increased dramatically, rising from 1.4 per thousand working age population in 1970 to 8.5 in 2002. We use a heterogeneous agent life-cycle model with competitive financial intermediaries who can observe households' earnings, age and current asset holdings to evaluate several commonly offered explanations. We find that increased uncertainty (income shocks, expense uncertainty) cannot quantitatively account for the rise in bankruptcies. Instead, the rise in filings appears to mainly reflect changes in the credit market environment. We find that credit market innovations which cause a decrease in the transactions cost of lending and a decline in the cost of bankruptcy can largely accounting for the rise in consumer bankruptcy. We also argue that the abolition of usury laws and other legal changes are unimportant.
    JEL: E21 E44 G18 K35
    Date: 2007–09
  30. By: Elkayam, David; ILek, Alex
    Abstract: In this paper we analyze the information content of data on inflationary expectations derived from the Israeli bond market. The results indicate that these expectations are unbiased and efficient with respect to the variables considered. In other words, we cannot reject the hypothesis that these expectations are rational. The existence of continuous data of this type, which is unique to the Israeli economy, enables us to test a number of hypotheses concerning the nature of price adjustment. The study found that expected inflation is a primary factor in the explanation of current inflation. This result is in agreement with the neo-Keynesian approach according to which the adjustment of prices is costly and as a result price increases in the present are determined primarily by expectations of future price increases. It was also found that inflation in Israel is better explained by the neo-Keynesian approach than by the Classical approach or the 'lack of information' approach according to which current inflation is determined by past, rather than current, inflationary expectations. Another issue examined in this study is whether inflationary inertia existed in Israel during the 1990s. From conventional estimation of an inflation equation (i.e. using future inflation as proxy for expectations) one can get the impression that there was strong inflationary inertia during this period. However, when data on inflationary expectations from the bond market were used in the estimation, this inertia (i.e. lagged inflation) became negative (and insignificant). This finding raise the possibility that inflationary inertia that is found elsewhere is not a structural phenomenon but an outcome of lack of reliable data on inflationary expectations.
    Keywords: Inflation; Rational Expectations;
    JEL: E39
    Date: 2007–09
  31. By: Claudio Campanale (University of Alicante, Spain); Rui Castro (University of Montreal, Canada.); Gian Luca Clementi (New York University, USA and The Rimini Centre for Economic Analysis, Italy)
    Abstract: In this paper we provide a thorough characterization of the asset returns implied by a simple general equilibrium production economy with convex investment adjustment costs. When households have EpsteinÐZin preferences, there exist plausible parameter values such that the model generates unconditional mean riskÐfree rate and equity return, and volatility of consumption growth, which are in line with historical averages for the US economy. Consistently with the data, the priceÐdividend ratio is proÐcyclical and stock returns are predictable (and increasingly so as the time horizon increases), while dividend growth is not. The model also implies realistic values for (i) the correlation of the riskÐfree rate with output growth and consumption growth and (ii) the correlation pattern between riskÐfree rate, equity return, and equity premium. The risk implied by the model is rather low. Given the work of Rabin (2000) among others, it is not surprising that our EpsteinÐZin agent exhibits a much higher risk aversion when faced with substantially larger risks. This shortcoming, however, does not extend to the case in which agents are disappointment averse in the sense of Gul (1991). When faced with a lottery that has a coefficient of variation 100 times as large as that implied by our model, a disappointment averse agent displays the same relative risk aversion as an expected utility agent with logarithmic utility!
    Keywords: Equity Premium, Business Cycle, Predictability, Disappointment Aversion.
    JEL: D81 E32 E43 E44 G12
    Date: 2007–07
  32. By: David Andolfatto (Simon Fraser University)
    Abstract: I study a version of the Lagos-Wright (2005) model for which the Friedman rule is always a desirable policy, but where implementation may be constrained by the need to respect incentive-feasibility. In the environment I consider, incentives are distorted owing to private information and limited commitment. I demonstrate that a monetary economy can overcome the former friction, but not necessarily the latter. When this is so, there is an incentive-induced lower bound to the rate of deflation away from the Friedman rule. There are also circumstances in which the best incentive-feasible monetary policy may entail a strictly positive rate of inflation. This will be the case, for example, if agents are sufficiently impatient or if there are rapidly diminishing returns to production.
    Date: 2007
  33. By: Chowdhury , Abdur R. (BOFIT)
    Abstract: This paper examines whether terms of trade shocks have an asymmetric effect on private savings in transition economies. A simple three-period framework is developed to show that, in the presence of binding credit constraints in bad states of nature, savings rates can be sensitive to favorable movements in the permanent component of the terms of trade. This result contrasts with the prediction of the conventional consumption-smoothing model. Empirical analysis with a dynamic panel model further confirms that while favorable movements in the permanent component of the terms of trade have an asymmetric effect on private savings, the magnitude of the effect is relatively small. The results are robust for alternative estimators, determinants, and country groupings.
    Keywords: transition; private savings; terms of trade
    JEL: E21 F10 P33
    Date: 2007–09–04
  34. By: Geng Li
    Abstract: The Rational Expectations Permanent Income Hypothesis (RE-PIH) fails to explain several features of consumption behavior documented by previous researchers. First, the marginal propensity to consume (MPC) out of unanticipated income shocks tends to decrease as the size of the shocks becomes larger. Second, the MPC out of small income shocks is well above what the RE-PIH predicts. Third, consumption responds to small anticipated income changes, but not to large ones. This paper argues that these findings can be reconciled within a RE-PIH framework that includes a cash-in-advance constraint. In the model, the representative agent is assumed to be fully rational with perfect information and is able to borrow against future income. The agent can hold cash and interest-bearing assets, but has to pay a fixed transaction cost to transfer wealth between cash and assets. I show that the agent follows an s-S rule with respect to cash holdings in making wealth-transfer decisions. The MPC within the no-transfer band is higher than that out of the band. It can be lower than or exactly equal to 1. The model also predicts that agents smooth consumption in response to news of large future income changes but not to small ones. Furthermore the model sheds light on the demand for liquid assets and the equity premium puzzle.
    Date: 2007
  35. By: Emmanuel Dhyne (National Bank of Belgium and Centre de Recherche WarocquŽ, UniversitŽ de Mons-Hainaut, Belgium); Jerzy Konieczny (Wilfrid Laurier University, Waterloo, Ont., Canada and The Rimini Centre for Economic Analysis, Rimini, Italy)
    Abstract: Temporal distribution of individual price changes is of crucial importance for business cycle theory and for the microfoundations of price adjustment. While it is routinely assumed that price changes are staggered over time, both theory and evidence are ambiguous. We use a large Belgian data set to analyze whether price changes are staggered or synchronized. We find that the more aggregated are the data, the closer is the distribution to perfect staggering. This result holds both for aggregation across goods, and across locations. Our results provide support for BhaskarÕs (2002) model of synchronized adjustment within, and staggered adjustment across, industries.
    Date: 2007–07
  36. By: Michael G. Plummer (Johns Hopkins University SAIS-Bologna, Italy and Ganeshan Wignaraja, Asian Development Bank)
    Abstract: Bilateral and regional cooperation initiatives in Asia have been growing in importance over the last five years. These accords span the real and financial sectors; rather than following the more typical pattern of Òtrade first, money laterÓ, recent policy initiatives involve the simultaneous implementation of trade and monetary/financial accords. Given this sequence, is there a case for monetary union in East Asia? Is there a case for expanded free-trade areas (FTAs) in the region? This paper attempts to answer these questions using a variety of empirical techniques, including a Computational General Equilibrium (CGE) model, to evaluate the economics of monetary/financial integration and various configurations of FTAs in Asia. We conclude that, at present, the post-sequencing of economic integration in Asia is developing such that trade agreements will ultimately complement the movement toward financial and monetary integration. While the political constraint on monetary union is real, it is argued that FTAs should help relax this constraint, adding a political complement to the trade complement.
    Date: 2007–07
  37. By: Theodore Panagiotidis (Loughborough University, UK, and Rimini Centre for Economic Analysis, Italy.); Gianluigi Pelloni (University of Bologna and Rimini Centre for Economic Analysis, Italy.)
    Abstract: The assumption of linearity is tested using five statistical tests for the US and Canadian unemployment rates, growth rates of the sectoral shares of construction, finance, manufacturing and trade sectors. An AR(p) model was used to remove any linear structure from the series. Evidence of non-linearity is found for the sectoral shares with all five statistical tests in the US case but not in the aggregate level. The results for Canada are not so clear-cut. Evidence of unspecified non-linearity is found in the unemployment rate and in the sectoral shares. Overall important asymmetries are found in disaggregated labour market variables in the univariate setting. The linearity hypothesis was also examined in a multivariate framework. Evidence is provided that important asymmetries exist and a linear VAR cannot capture the dynamics of employment reallocation.
    Keywords: Non-linearity, Sectoral Shares
    JEL: C22 C50 E24
    Date: 2007–07
  38. By: Pierdzioch, Christian; Kempa, Bernd; Hendricks, Torben
    Abstract: We find that banks’ buy and sell recommendations only have a minor effect on the out-of-sample predictability of daily stock returns and the market-timing ability of an investor trading in real time in the German DAX30 stock index. Banks’ stock recommendations may improve the performance of simple trading rules in real time. These improvements, however, are in general small and sensitive to the model-selection criterion being used by an investor to set up a forecasting model for stock returns.
    Keywords: Forecasting stock returns; trading rules; buy and sell recommendations by banks
    JEL: G11 E44 C53
    Date: 2007–01–09
  39. By: Ralph S.J Koijen; Otto Van Hemert; Stijn Van Nieuwerburgh
    Abstract: The fraction of newly-originated mortgages that are of the adjustable-rate (ARM) versus the fixed-rate (FRM) type exhibits a surprising amount of time variation. A simple utility framework of mortgage choice points to the bond risk premium as theoretical determinant: when the bond risk premium is high, FRM payments are high, making ARMs more attractive. We confirm empirically that the bulk of the time variation in household mortgage choice can be explained by time variation in the bond risk premium. This is true regardless of whether bond risk premia are measured using forecasters' data, a VAR term structure model, or a simple rule-of-thumb based on adaptive expectations. This simple rule-of-thumb moves in lock-step with mortgage choice, thereby lending further credibility to a theory of strategic mortgage timing by households.
    JEL: D14 E43 G11 G12 R2
    Date: 2007–09
  40. By: Nahas, Charbel; Dessus, Sebastien; Berthelemy, Jean-Claude
    Abstract: This paper attempts to identify Lebanon ' s greatest constraints to economic growth, following a growth diagnosis approach. It concludes that fiscal imbalances and barriers to entry are most binding on long-term growth. Macroeconomic imbalances and related perceived risks affect the nature of investment decisions in Lebanon, in favor of liquid instruments rather than longer-term productive investments. Further, many barriers to entry discourage agents from investing in a number of markets: legal impediments to competition, corruption, and a set of fiscal incentives favoring the allocation of resources to non-tradable sectors, where potential demand and investment opportunities are scarcer. In turn, using a steady-state computable general equilibrium model, the paper assesses the long-term growth impact of a selected set of policy reforms envisaged to lift such constraints. Results suggest that 1 to 2 percentage points of additional GDP growth per year could be gained through public expenditure reform, greater domestic competition, and tax harmonization.
    Keywords: Economic Theory & Research,Debt Markets,,Emerging Markets,Access to Finance
    Date: 2007–08–01
  41. By: Levkov, Alexey; Levine, Ross; Beck, Thorsten
    Abstract: Policymakers and economists disagree about the impact of bank regulations on the distribution of income. Explo iting cross-state and cross-time variation, the authors test whether liberalizing restrictions on intra-state branching in the United States intensified, ameliorated, or had no effect on income distribution. The analysis finds that branch deregulation lowered income inequality by affecting labor market conditions, not by boosting the business income of the poor, nor by enhancing educational attainment. Reductions in the earnings gap between men and women and between skilled and unskilled workers account for the bulk of the explained drop in income inequality.
    Keywords: Emerging Markets,Economic Theory & Research,Inequality,,Fiscal & Monetary Policy
    Date: 2007–08–01
  42. By: L. Randall Wray
    Abstract: While the mainstream long argued that the central bank could use quantitative constraints as a means to controlling the private creation of money, most economists now recognize that the central bank can only set the overnight interest rate-which has only an indirect impact on the quantity of reserves and the quantity of privately created money. Indeed, in order to hit the overnight rate target, the central bank must accommodate the demand for reserves, draining the excess or supplying reserves when the system is short. Thus, the supply of reserves is best characterized as horizontal, at the central bank's target rate. Because reserves pay relatively low rates, or even zero rates (as in the United States), banks try to minimize their holdings. Over time, they continually innovate, as they seek to minimize costs and increase profits. This includes innovations that reduce the quantity of reserves they need to hold (either to satisfy legal requirements, or to meet the needs of check cashing and clearing), and also innovations that allow them to increase the rate of return on equity within regulatory constraints, such as those associated with Basle agreements. Such behavior has been a central concern of the structuralist approach-which argued that it is too simplistic to hypothesize simple horizontal loan-and-deposit supply curves.
    Date: 2007–09
  43. By: Horvath , Julius (BOFIT)
    Abstract: The first part of this paper is a review of significant papers in the vast literature on optimum currency area (OCA) theory. The author focuses on the main classical contributions, then considers modern treatment of OCA theory. The second part considers empirical literature on the types of geographical areas that might constitute optimum currency areas, particularly with respect to asymmetry and symmetry of shocks.
    JEL: E42 F33
    Date: 2007–09–06
  44. By: Maynard, Jean-Pierre
    Abstract: This study examines differences in gross domestic product (GDP) per capita between Canada and the United States from 1994 to 2005. The gap in GDP per capita between the two countries has narrowed slightly over this period. The study decomposed the gap into two components: one due to labour productivity and one due to labour market conditions, and shows that the relative importance of the two changed considerably after 2000. The output gap has narrowed slightly since 2000, primarily because Canada's labour market experienced a faster rate of job growth relative to its population than did the United States.
    Keywords: Economic accounts, Gross domestic product, Productivity accounts
    Date: 2007–08–31
  45. By: Carlo Domenico Mottura; Andrea Gheno
    Date: 2007–07
  46. By: Rolf Schenker (KOF Swiss Economic Institute, ETH Zurich)
    Abstract: This paper compares quantitative and qualitative data on firm level. The data is taken from two Swiss investment surveys. This has not yet been done in the literature. We will see that the mean change in investment of firms planning to increase (decrease) investments is positive (negative). In contrast, the mean change in investment of firms indi- cating “no change” is indeed virtually zero. Carlson & Parkin (1975) assume the quantitative observations to follow a normal distribution. Other research (e.g. Dasgupta & Lahiri 1992) has been done assuming other distributions. In this paper we show that the micro data does not follow a normal, logistic or exponential distribution. Furthermore, we adopt the response functions presented by Ronning (1984) to the investment data. They help us to determine the share of firms giving the different qualitative statement for every instance of the quantitative data. We will show that with larger (smaller) quantitative changes, more firms give positive (negative) qualitative statements.
    Keywords: C5, E22, C42
    Date: 2007–06
  47. By: Silke Anger
    Abstract: Using individual based micro-data from the German Socio-Economic Panel Study (SOEP), I analyze the cyclicality of real wages for male workers within employer-employee matches over the period 1984-2004, and compare different wage measures: the standard hourly wage rate, hourly wage earnings including overtime and bonus payments, and the effective wage, which takes into account not only paid overtime, but also unpaid working hours. None of the hourly wage measures is shown to exhibit cyclicality except for the group of salaried workers with unpaid overtime. Their effective wages react strongly to changes in unemployment in a procyclical way. Despite acyclical wage rates, salaried workers without unpaid hours but with income from extra payments, such as bonuses, experienced procyclical earnings movements. Monthly earnings were also procyclical for hourly paid workers who received overtime payments. The procyclicality of earnings revealed for Germany is of comparable size with the one in the U.S.
    Keywords: Wage cyclicality, effective wages, unpaid overtime, bonus payments, firm stayers
    JEL: E32 J31
    Date: 2007
  48. By: Daniel Levy (Bar-Ilan University, Israel and Emory University, USA and Rimini Centre for Economic Analysis, Rimini, Italy); Dongwon Lee Author-Workplace-Name: Korea University; Haipeng Allan Chen Author-Workplace-Name: University of Miami, USA; Robert J. Kauffman Author-Workplace-Name: Arizona State University and University of Minnesota, USA; Mark Bergen Author-Workplace-Name: University of Minnesota, USA
    Abstract: We offer new evidence on the link between price points and price rigidity using two datasets. One is a large weekly transaction price dataset, covering 29 product categories over an eight-year period from a large U.S. supermarket chain. The other is from the Internet, and includes daily prices over a two-year period for 474 consumer electronic goods covering ten product categories, from 293 different Internet retailers. Across the two datasets, we find that (i) 9 is the most frequently used price-ending for the penny, dime, dollar and the ten-dollar digits, (ii) the most common price changes are in multiples of dimes, dollars, and ten-dollars, (iii) 9-ending prices are at least 24% (and as much as 73%) less likely to change in comparison to prices ending with other digits, and (iv) the average size of the price change is higher if the price ends with 9 in comparison to non-9-ending prices. This link between price points and price rigidity is robust across a wide range of prices, products, product categories, and retail formats. We offer a behavioral explanation for the findings.
    Date: 2007–07
  49. By: Groneck, Max; Plachta, Robert
    Abstract: Die Arbeit untersucht die bestehenden Budgetregeln in Deutschland und stellt zwei aktuelle Reformvorschläge vor, die Schweizer Schuldenbremse und die Schuldenschranke des Sachverständigenrats. Investitionen nach dem Haushaltsrecht werden mit dem Nettoinvestitionsbegriff verglichen und auf ihre Eignung geprüft, die Obergrenze für die Aufnahme von Krediten nach der Goldenen Regel zu bilden. Eine ex-post Simulation der Reformvorschläge für die deutschen Bundesländer offenbart die Konsolidierungshöhe, die damit einhergehenden Leistungseinschränkungen und die Entwicklung der Verschuldung. Dabei wird die bislang in der Literatur verwendete Methodik mit einer neuen polit-ökonomischen Simulation verglichen, die zu realitätsnäheren Ergebnissen führt. This paper analyses the shortcomings of the current budget rules for the Bundesländer, especially the definition of public investment that is used as a deficit ceiling in Germany. Two alternative budget rules are analysed, the Swiss debt brake as well as a version incorporating a golden rule presented by the the German Council of Economic Experts. A simulation reveals the necessary consolidation path, the loss of benefits, and the recursive development of public debt. In addition to the standard simulation method we present a politico-economic approach that leads to new results.
    Keywords: Verschuldung der Bundesländer, Schuldenbremse, Schuldenschranke, Goldene Regel, Öffentliche Investitionen, Public debt, German Bundesländer, debt brake, golden rule, public investment
    Date: 2007
  50. By: Raquel Fernandez
    Abstract: Married women's labor force participation has increased dramatically over the last century. Why this has occurred has been the subject of much debate. This paper investigates the role of culture as learning in this change. To do so, it develops a dynamic model of culture in which individuals hold heterogeneous beliefs regarding the relative long-run payoffs for women who work in the market versus the home. These beliefs evolve rationally via an intergenerational learning process. Women are assumed to learn about the long-term payoffs of working by observing (noisy) private and public signals. They then make a work decision. This process generically generates an S-shaped figure for female labor force participation, which is what is found in the data. The S shape results from the dynamics of learning. I calibrate the model to several key statistics and show that it does a good job in replicating the quantitative evolution of female LFP in the US over the last 120 years. The model highlights a new dynamic role for changes in wages via their effect on intergenerational learning. The calibration shows that this role was quantitatively important in several decades.
    JEL: E2 J21 Z1
    Date: 2007–09
  51. By: Jérôme Blanc (LEFI - Laboratoire d'économie de la firme et des institutions - [Université Lumière - Lyon II])
    Abstract: Œuvre postérieure à Proudhon mais reliée à lui, la proposition d’une économie franche et plus spécifiquement d’une monnaie franche par Silvio Gesell, auteur allemand venu sur le tard à l’économie, socialiste proudhonien, décrit par beaucoup comme une sorte de prophète, a jusqu’ici, mais en partie seulement, échappé au destin peu enviable de la plupart des propositions de réforme monétaire qualifiées d'utopiques. Après avoir survolé la vie et l’œuvre de Silvio Gesell, on s’intéressera aux relations que sa pensée entretient avec celle de Proudhon avant de se centrer sur sa proposition de réforme monétaire — ce qui signifie qu’on laissera de côté son analyse spécifique de la terre et ses conclusions relatives à la rente foncière.
    Keywords: Histoire de la pensée économique;socialisme;Proudhon;Gesell;idées monétaires
    Date: 2007–08–28
  52. By: John J. Heim (Department of Economics, Rensselaer Polytechnic Institute, Troy, NY 12180-3590, USA)
    Abstract: Rising exchange rates strengthen the dollar and lower prices on imported consumer goods. Lower import prices have two effects. (1) A substitution effect that shifts demand from domestically produced goods to imports. (2) An income effect that increases demand for imports even further. However, it also allows some income previously spent on imports, but no longer needed due to lower import prices, to be shifted to purchases of domestic goods. This paper finds that for the U.S., 1960 - 2000, the income effect overwhelmed the substitution effect. As a result, econometric results suggest declining import prices increased both import demand and demand for domestically produced consumer goods. The estimated increase in demand for domestically produced consumer goods and services was 3.4 times as large as the increase in demand for consumer imports. Also, because of the large increase in GDP resulting from growth in domestic demand, the trade deficit grew slower than domestic output of consumer goods. This finding suggests that while the trade deficit grows as a result of a strengthening dollar, the increase, as a percent of U.S. GDP, is small, about four tenths of a percent for a ten percent strengthening of the dollar.
    JEL: E00 F40
    Date: 2007–08
  53. By: Alan L. Gustman; Thomas Steinmeier; Nahid Tabatabai
    Abstract: This paper investigates the reasons for discrepancies between the pension plan type reported by respondents to the Health and Retirement Study (HRS) and pension plan type obtained from documents produced by their employers, called Summary Plan Descriptions (SPDs). The analysis suggests the discrepancies are sizable and are mainly due to misreports by respondents. Discrepancies between respondent and firm reports of plan type are first documented for different years and from different data sources. Changes over time in respondent and firm reports are analyzed for those who say their plans did not change. Plan type from payroll data produced by Watson Wyatt, a pension consulting company, is examined and compared to respondent reports for employees covered by Watson Wyatt plans. The Watson Wyatt payroll data report plan type without error, and yet we find the patterns of discrepancies between respondent and firm provided data are the same as for the HRS employer and respondent data. We also explore other evidence gathered by the HRS in the course of interviews and various experiments. Our findings that errors are mainly the result of misreporting by respondents, together with findings from experiments, suggest a number of changes in survey design that can help to reduce reporting error. They also suggest that models of retirement and saving behavior should allow for imperfect knowledge by decision makers.
    JEL: D31 E21 H55 J14 J26 J32
    Date: 2007–09
  54. By: Borys Grochulski; Narayana Kocherlakota
    Abstract: In this paper, we consider economies in which agents are privately informed about their skills, which are evolving stochastically over time. We require agents' preferences to be weakly separable between the lifetime paths of consumption and labor. However, we allow for intertemporal nonseparabilities in preferences like habit formation. We show that such nonseparabilities imply that optimal asset income taxes are necessarily retrospective in nature. We show that under weak conditions, it is possible to implement a socially optimal allocation using a social security system in which taxes on wealth are linear, and taxes/transfers are history-dependent only at retirement. The average asset income tax in this system is zero.
    JEL: E60 H21
    Date: 2007–09
  55. By: Faheem Jehangir Khan (Pakistan Institute of Development Economics, Islamabad.); Yaser Javed (Quaid-i-Azam University, Islamabad.)
    Abstract: Provision of safe drinking water, adequate sanitation and personal hygiene are vital for the sustainable environmental conditions and reducing the incidence of diarrhoea, malaria, trachoma, hepatitis A & B and morbidity levels. Not having access to water and sanitation is a courteous expression for a form of deprivation that threatens life, destroys opportunity and undermines human dignity. Thus, investing in the provision of safe water supply and adequate sanitation is not only a development oriented strategy in itself, it can also yield other socio-economic benefits in terms of improved health status, quality of labour force and reduced burden-of-disease. Water and Sanitation is the neglected sector in Pakistan. Most of the households in Pakistan do not have access to safe drinking water and lack toilets and adequate sanitation systems. These poor people, mostly living in rural areas or urban slums, are not only deprived of financial resources, but they also lack admittance to basic needs such as education, health, safe water supply and environmental sanitation facilities. As of 2005, approximately 38.5 million people lacked access to safe drinking water source and approximately 50.7 million people lacked access to improved sanitation in Pakistan. By year 2015, if this trend continues, 52.8 million people will be deprived of safe drinking water and 43.2 million people will have no access to adequate sanitation facilities in Pakistan. It is not to calculate what percentages of population have access to a particular service so far and how much numbers of beneficiaries will be added by year 2015; it is to investigate that even if we meet the national and/or regional targets in Pakistan, how much population will still be deprived of these most basic human needs.
    Keywords: Drinking Water, Sanitation, Solid Waste, Waste Water, Public Policy, Public Expenditure, Hygiene
    JEL: C12 C13 C92 E61 E62 G18 H54 I18 I38 O11 O18 C82
    Date: 2007

This nep-mac issue is ©2007 by Soumitra K Mallick. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.